Hamish McRae: Italians do the eurozone a favour by checking austerity

Economic View: The policies imposed on the weaker eurozone members have reached the limits of the politically possible

Beware warnings of earthquakes, at least of the political variety. There is a temptation to see the Italian electorate's rejection of austerity, which it was, as a catastrophe for the eurozone. It may eventually turn out that way, and I think the balance of probability is that Italy will eventually default on its debts, but in the immediate future it is possible that the Italian voters may have done the eurozone a good turn. They have checked austerity and they will trigger a monetary boost.

The argument goes like this: Governments have to balance their books over the long-term and the "technocratic" government of Mario Monti has made decent progress on that score. But the costs, not just in loss of economic output but in damaging the life prospects for a mass of young people, have been dreadful. Worse, the fiscal squeeze has not been accompanied by a corresponding squeeze on bureaucratic costs. Worse still, Italy has barely begun to make the structural changes, notably in the labour market, that will enable it to regain sustained growth.

It is easy to see why. It is always difficult to assault privilege, always hard to take something away. That is why it is much better to push through reforms in good times rather than bad, though unfortunately it is during bad times that the pressure mounts to take action. It is also better to to spread the burden of austerity as widely as possible, for example by devaluing the currency – which increases inflation and thereby hits all spenders – rather than piling the burden onto a narrow band of people, such as the young unemployed.

But by doing austerity without reform (or rather with only limited reform) and doing so without a democratic mandate (the Monti government was imposed) Italy has tested this particular approach to destruction. Something else must follow.

We cannot know what that will be. But what we do know is that the policies imposed on the weaker eurozone members have reached the limits of the politically possible. For example, it is not now conceivable that Ireland or Portugal will be required to tighten policy any more. The Irish economy, incidentally, seems to be picking up a little pace with unemployment falling sharply in the final quarter of last year, albeit to the dreadfully high level of 14.2 per cent. Spain? Well, it will stagger on with the partial bail-out of its banking system until it needs further financing, which it will get. As for Greece, it is simply not possible to impose any further austerity on the country.

However, if we have reached the limits of one policy, it is worth noting that this is having an effect. If you look at the fiscal position of individual countries there are some concerns, but if you look at the eurozone as a whole, it is making a swifter correction to its previous mistakes than either the US or UK and vastly swifter than Japan. I have put in the graphs both the costs of austerity (in unemployment) and the progress towards a balanced budget – a structural balance; that is, a balance over the economic cycle, rather than an absolute one.

So you can see, as a grand generalisation, that eurozone finances are in better shape than ours. Yet of the large European economies, only Germany can borrow more cheaply than the UK. Italy borrowed for 10 years at just over 4.8 per cent, a rate that markets seemed to feel acceptable. But the yield on the equivalent UK debt fell close to 1.9 per cent, the lowest since early January, as investors began again to see gilts as a "safe haven". (There is a nice irony that long-term gilt yields are now lower than they were ahead of that ratings downgrade last Friday. Clearly what matters is not what the rating agencies say, what matters is what investors feel.)

So what will happen? I cannot guess at how Italian politics will develop but I can just see the weaker eurozone economies, Greece apart, managing to stabilise themselves enough over the next few months to avoid a eurozone break-up in the next three or four years. For example, eurozone economic sentiment is still low but is starting to climb a little, and while bank lending is weak, eurozone money supply is growing, a slightly different signal of better sentiment – though retail sentiment is still dire.

There is one further force that we will see deployed in the coming months: the European Central Bank not only finding further ways of easing credit but also directly buying sovereign debt. The mere threat to do the latter, provided countries were following sound economic policies, from the ECB president Mario Draghi did calm the markets for several months. The balance of probability now is the ECB will have to carry out that threat, though it is impossible to see the circumstances with any clarity. We have seen the limits to austerity but we have yet to see the limits of ECB monetary policy and that is where attention will now shift.

GDP revisions put paid to all that talk of a triple-dip

A quick word about those revised gross domestic product figures.

The headline contraction for the final quarter of last year was unrevised at 0.3 per cent, but revisions to earlier data show that the economy was not flat last year but grew a little, albeit by only 0.2 per cent. That is the total economy. If you knock off the impact of the decline in North Sea oil and gas and look at the onshore economy, it grew by 0.6 per cent. That is not great; in fact it is pretty terrible. But I expect further revisions to come through and show it grew by around 1 per cent last year, the common sense "feel" you get from looking at things like VAT revenues and employment.

Simon Ward at Henderson makes a further point. Revisions to old GDP data show that if you look at the onshore economy and allow for the impact of an extra bank holiday, there was only one quarter, the fourth quarter of 2011, when the economy has contracted since the main recession. So there was no "double dip". So there can be no "triple dip".

He comments: "Will the triple-dippers please acknowledge their mistake, or else make clear that their phantom recessions reflect weak North Sea production, bank holidays and the impossibility of hosting the Olympics every quarter?

PROMOTED VIDEO
News
video
Life and Style
tech
Arts and Entertainment
Southern charm: Nicolas Cage and Tye Sheridan in ‘Joe’
filmReview: Actor delivers astonishing performance in low budget drama
Arts and Entertainment
While many films were released, few managed to match the success of James Bond blockbuster 'Skyfall'
film
Arts and Entertainment
Up my street: The residents of the elegant Moray Place in Edinburgh's Georgian New Town
tvBBC's The Secret History of Our Streets reveals a fascinating window into Britain's past
Extras
indybest
News
Albus Dumbledore, the headmaster of Hogwarts School of Witchcraft and Wizardry has been the teaching profession's favourite teacher
education
News
ebookA unique anthology of reporting and analysis of a crucial period of history
Sport
Luis Suarez looks towards the crowd during the 2-1 victory over England
sport
Life and Style
Cheesecake frozen yoghurt by Constance and Mathilde Lorenzi
food + drinkThink outside the cool box for this summer’s frozen treats
News
John Barrowman kisses his male “bride” at a mock Gretna Green during the Commonwealth Games opening ceremony
peopleBarrowman's opening ceremony message to Commonwealth countries where he would be sent to prison for being gay
Sport
Sir Bradley Wiggins removes his silver medal after the podium ceremony for the men’s 4,000m team pursuit in Glasgow yesterday
Commonwealth games Disappointment for Sir Bradley in team pursuit final as England are forced to settle for silver
Sport
Alistair Brownlee (right) celebrates with his gold medal after winning the men’s triathlon alongside brother Jonny (left), who got silver
England's Jodie Stimpson won the women’s triathlon in the morning
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Junior Research Analyst - Recruitment Resourcer

£18000 - £20000 per annum + OTE £25K: SThree: SThree Group has been well estab...

Senior Analyst - Financial Modelling

competitive: Progressive Recruitment: This really is a fantastic chance to joi...

Associate CXL Consultant

£40000 - £60000 per annum + BONUS + BENEFITS: Harrington Starr: CXL, Triple Po...

Business Anaylst

£60000 - £75000 per annum + BONUS + BENEFITS: Harrington Starr: Business Anal...

Day In a Page

Backhanders, bribery and abuses of power have soared in China as economy surges

Bribery and abuses of power soar in China

The bribery is fuelled by the surge in China's economy but the rules of corruption are subtle and unspoken, finds Evan Osnos, as he learns the dark arts from a master
Commonwealth Games 2014: Highland terriers stole the show at the opening ceremony

Highland terriers steal the show at opening ceremony

Gillian Orr explores why a dog loved by film stars and presidents is finally having its day
German art world rocked as artists use renowned fat sculpture to distil schnapps

Brewing the fat from artwork angers widow of sculptor

Part of Joseph Beuys' 1982 sculpture 'Fettecke' used to distil schnapps
BBC's The Secret History of Our Streets reveals a fascinating window into Britain's past

BBC takes viewers back down memory lane

The Secret History of Our Streets, which returns with three films looking at Scottish streets, is the inverse of Benefits Street - delivering warmth instead of cynicism
Joe, film review: Nicolas Cage delivers an astonishing performance in low budget drama

Nicolas Cage shines in low-budget drama Joe

Cage plays an ex-con in David Gordon Green's independent drama, which has been adapted from a novel by Larry Brown
How to make your own gourmet ice lollies, granitas, slushy cocktails and frozen yoghurt

Make your own ice lollies and frozen yoghurt

Think outside the cool box for this summer's tempting frozen treats
Ford Fiesta is UK's most popular car of all-time, with sales topping 4.1 million since 1976

Fiesta is UK's most popular car of all-time

Sales have topped 4.1 million since 1976. To celebrate this milestone, four Independent writers recall their Fiestas with pride
10 best reed diffusers

Heaven scent: 10 best reed diffusers

Keep your rooms smelling summery and fresh with one of these subtle but distinctive home fragrances that’ll last you months
Commonwealth Games 2014: Female boxers set to compete for first time

Female boxers set to compete at Commonwealth Games for first time

There’s no favourites and with no headguards anything could happen
Five things we’ve learned so far about Manchester United under Louis van Gaal

Five things we’ve learned so far about United under Van Gaal

It’s impossible to avoid the impression that the Dutch manager is playing to the gallery a little
Screwing your way to the top? Good for Lana Del Rey for helping kill that myth

Screwing your way to the top?

Good for Lana Del Rey for helping kill that myth, says Grace Dent
Will the young Britons fighting in Syria be allowed to return home and resume their lives?

Will Britons fighting in Syria be able to resume their lives?

Tony Blair's Terrorism Act 2006 has made it an offence to take part in military action abroad with a "political, ideological, religious or racial motive"
Beyoncé poses as Rosie the Riveter, the wartime poster girl who became a feminist pin-up

Beyoncé poses as Rosie the Riveter

The wartime poster girl became the ultimate American symbol of female empowerment
The quest to find the perfect pair of earphones: Are custom, 3D printed earbuds the solution?

The quest to find the perfect pair of earphones

Earphones don't fit properly, offer mediocre audio quality and can even be painful. So the quest to design the perfect pair is music to Seth Stevenson's ears
US Army's shooting star: Lt-Col Steven Cole is the man Hollywood calls when it wants to borrow a tank or check a military uniform

Meet the US Army's shooting star

Lt-Col Steven Cole is the man Hollywood calls when it wants to borrow a tank or check a military uniform